Behind Facebook's tax bill

A tax advocacy group says Facebook, which made $1 billion in U.S. profit before taxes last year, will pay no U.S. income tax for 2012.

Tax experts say that could possibly be true -- and if so, it's perfectly legal -- but it's only part of the story. At issue is a sizable tax deduction from stock options that Facebook issued to its employees.

Stock options, like regular cash salaries, are tax-deductible for companies. Companies can use those deductions to offset their profits, and apply those losses to previous years, too. That's how a company could even be eligible for a refund in a year when it made money.

Citizens for Tax Justice, the advocacy group, says Facebook(FB) will receive a tax refund of nearly $430 million as a result of those options.

Facebook said in an e-mail that the company believes "in paying our fair share, and we do pay our fair share."

Independent tax experts say CTJ isn't wrong, exactly, but that the group doesn't tell the whole story. They say CTJ is mixing together tax law and corporate accounting policies, which sometimes follow different sets of rules.

"[CTJ] is talking about apples and oranges ... by mixing up two sets of rules, it's easy to give misleading information," said Stan Pollock, a San Francisco CPA who specializes in stock-options planning.

A company could, for example, properly follow accounting rules that show the income impact of issuing stock options, but the IRS requires different rules for computing the tax bill.

In fact, companies can be profitable on an accounting basis and be unprofitable for tax purposes -- and both are correct under the different rules.

As far as the check Facebook or any company gives to or receives from the IRS, Pollock said that's another swampy issue. "Tax returns are private," Pollock said. "Companies give numbers in their financial statements that aren't necessarily the true tax numbers as far as the IRS is concerned."

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Another expert pointed out that even if Facebook gets an income tax refund, it doesn't mean the tax revenue is simply lost. Employees who cash in their stock options pay taxes on them, often at higher rates than a corporation would pay.

"Some people have a hard time recognizing both sides of it," said Dan Morris, a senior partner at San Jose CPA firm Morris and D'Angelo. "Where Facebook is taking a deduction, a person is counting that as income. U.S. taxpayers absolutely did not get the shaft here."

When a company issues a stock option, it gives an employee the right to buy shares in the future at today's "fair value" price. The company accounts for that value on its books at the time the option is issued, but it can't take the tax deductions until the employee exercises his or her option -- sometimes years later.

Plus, it's no easy feat to determine the fair value of stock for a company that isn't yet public.

"You might as well have a crystal ball and someone with a shawl over their head taking a guess," Morris said.

CTJ's report claims that "because companies typically low-ball the estimated values, they usually end up with bigger tax deductions."

The advocacy group isn't the only group making a stink about this tax provision. Sen. Carl Levin (D-Mich.) has proposed legislation that would require companies to take the deduction when the options are given.